In December, the UK government announced it would introduce legislation to clarify the status of litigation funding agreements (LFAs) underpinning investor class actions.
The uncertainty had been caused by a July 2023 ruling in a class action against US vehicle manufacturer PACCAR. The UK Supreme Court had held that certain third-party LFAs were unenforceable, causing turmoil in the litigation funding sector.
The case was brought on behalf of buyers of PACCAR commercial trucks, who claimed they had suffered losses because of a cartel that the European Commission found to have been operating between major truck manufacturers.
But the Supreme Court upheld PACCAR’s defence that, as the return for the litigation funders depended on the level of damages awarded to the claimants, the funding agreement constituted a so-called damages-based agreement (DBA).
In order to be enforceable, DBAs must follow the restrictions imposed by the 2013 DBA Regulations. However, funding agreements do not generally comply with these regulations, and consequently, the Supreme Court ruled that these agreements were largely unenforceable.
Following the ruling, the industry devised ways of making litigation funding viable for class actions, but there has been a fall in class action lawsuits, and the situation clearly needed resolving.
Certainty for litigation funders
In June last year, the Civil Justice Council (CJC) made recommendations to restore certainty for litigation funders and claimants.
The government has now announced its intention to introduce legislation clarifying that litigation funding agreements are not DBAs.
So what will be the effect of this new legislation?
Caroline Goodman, founder and chief executive of investor action specialist Institutional Protection (IP), says: “Legislation should bring some welcome relief to pension fund trustees in their litigation participation analysis, as it will bring the requisite certainty enshrined in statute. Investors should expect to see a further uptick in investor redress cases, and more competing opt-in cases to consider. We would also anticipate keener fee terms and simpler funding structures with more competition.”
In terms of funding, she adds: “We expect to see the re-entry of funders who had publicly withdrawn from the UK market due to the uncertainty around [the] PACCAR [ruling], bringing more funding and a more competitive market on terms, which is good news for investor claimants.”
According to Simon Bishop, a partner at law firm Hausfeld, the planned legislation should mean reduced enforceability risk when trustees enter into LFAs, and clearer authority to engage in funded securities actions on a wider range of commercial terms.
At a more general level, he comments: “Securities litigation is growing at pace in the UK, and the new law will contribute to this ongoing expansion, allowing investment capital to flow to the growing number of opportunities for institutional investors to make recoveries.”
Economic angle
There is also an economic angle to the proposed legislation.
In its press release, the government said the Supreme Court ruling had threatened the UK’s status as the global leader in dispute resolution, which the government claimed is a cornerstone of the country’s “booming” legal sector, worth £42.6bn a year to the economy.
Meanwhile, Tom Steindler, managing director with Exton Advisors, an independent advisory business in disputes finance, welcomes the intention to legislate, as he says it will mitigate the effect of the PACCAR decision, restoring the commonly understood position held previously, allowing funders to be paid a percentage of claim proceeds on success.
But he adds: “Importantly, the legislative timetable is uncertain, and the government’s recent announcement makes clear that the legislation will have prospective effect only, thereby rejecting the CJC’s recommendation that the legislation should also be retrospective.”
For ongoing cases, he says that amended funding agreements will stand.
“Any funders who are yet to make the necessary post-PACCAR amendments should consider doing so expeditiously,” he warns. “There is a risk that any proceeds obtained before the new legislation comes into effect would be treated on the basis of the post-PACCAR position.”
More options available
For future matters, Steindler says, there are likely to be more options available when it comes to the financing of claims.
But he cautions: “However, it is notable that many law firms already compete to act on the basis of DBAs in relation to group claims under the Financial Services and Markets Act – whereby their fee is a percentage of the financial benefit obtained – meaning that it is one of the few areas of group litigation where the legislation may have limited practical effect.”
The government is currently studying the other proposals put forward by the CJC, including the introduction of light-touch regulation of litigation funding, to replace the current voluntary, self-regulatory approach.
IP’s Goodman says: “We are anticipating that most of the CJC’s recommendations will be implemented, though timelines are less clear.”
A spokesperson for the Department of Justice said the legislation will be introduced when parliamentary time allows.
